Judgement day for the pension simplification review comes in the next fortnight and will open old wounds in the relationship between Prime Minister Tony Blair and Chancellor Gordon Brown.
When the National Audit Office publishes its review of the effect that the Inland Revenue's proposal for a £1.4m lifetime limit will have on pension saving and the numbers who will be affected, both Number 10 and Number 11 Downing Street will be looking to claim victory.
But while many in the industry see the NAO referral as a box-ticking exercise, this powerful organisation, which is independent of the Government and reports only to Parliament, could produce a surprise.
Last December, the Prime Minister's office – in response to a petition from captains of industry concerned at being cut out of pensions – was widely reported to have issued an 11th-hour demand that the limit should be raised because it was not going to hit only fat cats.
The Treasury and Revenue said 5,000 would be affected by the cap at the planned introduction date of April 2005, with a further 1,000 likely to be hit each year after that.
When Brown brought in the NAO to see who was right, he threatened to drop the entire simplification programme if it found against him, a move that Scottish Equitable pensions development director Stewart Ritchie described as the most bizarre he had seen in his career in pensions and that Scottish Life head of pension strategy Steve Bee said effectively put a gun to the head of the industry.
The Chancellor's position has left the entire project in limbo and ripped nearly four months out of the tight time-table for implementation by April 2005. Many expect the NAO to confirm the Treasury's view but, contrary to the assumptions of most in the pension industry, the NAO is not simply checking the Revenue's sums but is also carrying out its own fresh research. The NAO has been not afraid to upset the Government's apple cart in the past.
NAO spokesman Barry Lester says: “We are gathering new data and embracing new material for this review so, yes, there is a real chance of a different outcome to the results produced by the Treasury. We are entirely independent and can say whatever we wish.”
The NAO is looking at three issues – whether it is factually accurate that the £1.4m lifetime allowance is, using a factor of 20:1 to calculate the capital value of a defined-benefit pension, equivalent to the maximum pension available under the current cap, whether 5,000 people will be immediately hit by the lifetime limit and whether the Government is right that around 1,000 people a year will be affected in the future.
Occupational pensions are currently capped at £70,000 so the first of these issues is a foregone conclusion but responses to the second and third issues will make interesting reading as the rest of the industry has so strongly contradicted the Treasury's figures.
But has the industry fallen for Brown's brinkmanship and been panicked into accepting the £1.4m limit for fear of losing simplification?
National Association of Pension Funds spokesman Andy Fleming says: “We did criticise the level of the lifetime limit at the time it was announced and one of our particular concerns was the fact that many senior directors are likely to be hit and this could disenfranchise them from pensions generally. But if the alternative was losing the whole package, then frankly we would rather take it because we applaud the simplification proposals the Inland Revenue have put forward.”
Hornbuckle Mitchell Trus-tees managing director Mark Stubbs argues that lobbying has its limits. He says: “The industry has made extremely strong representations on the level of the £1.4m limit but you can only lobby so far. In the end, Gordon Brown is the one with the power and if he wants £1.4m, he will get it. But the fact remains that you cannot buy a £70,000 annuity with two-thirds spouse benefit and indexation for £1.4m.”
Stubbs thinks the Chancellor is not bothered whether it is 5,000 or 10,000 people who will be immediately hit by the cap because he views them as being pension fat cats and not his immediate concern, bearing in mind the overall pension crisis. As an economic group, they already get far more tax relief than most but Bee's view that directors should have as much pension tax relief as they like if they achieve significant take-up among their staff is surely more sophisticated.
The Treasury has made concessions to soften the effect of the £1.4m – the reduction in the penalty charge from 33 per cent to 25 per cent, the restoration of pre-75 drawdown death benefits and disregarding the £200,000 contribution limit in the year before retirement – and these have been welcomed by the industry.
But the fact remains that a £1.4m lifetime limit indexed to prices will catch increasing numbers of people and will affect many who would not have been hit by the earnings' cap if the downward trend in annuity rates continues.
ABI head of pensions and savings Joanne Segars says: “We certainly do not want to see the retention of eight pension tax regimes. The Revenue has given concessions such as the reduction in the penalty tax but we would clearly like to see the £1.4m indexed to wages rather than prices.”
Is the Treasury in a corner if the NAO finds against it? Many will be hoping that it does not come to that but what everyone is calling for is an end to the uncertainty and the real beginning of the legislative timetable.